TOKYO — With the Iran war sending oil prices into a vertical climb, the resulting shockwaves across global markets have investors balancing their portfolios like a high‑stakes game of Jenga on a trembling table.
The problem isn’t so much oil prices at over US$100 per barrel. Surging energy is merely a trigger — the thing that sets in motion a chain of events that destabilizes credit markets. In this case, the pulling out of blocks in hopes of keeping the whole financial tower from coming crashing down and causing broader trauma.
The job for financial analysts now is to identify where the fragilities lie and the extent to which they could trigger a 2008-like contagion event. At the moment, most of the focus is on the $1.8 trillion private credit space. And arguably no one is doing a better job of connecting the dots than Bank of America strategist Michael Hartnett.
As Hartnett wrote in a recent report: “Asset performance in 2026 is more ominously close to price action seen from mid’07 to mid’08” than most in the market want to admit. He detects “subprime tremors” at a moment when Wall Street is “ominously trading” in a 2007-2008 “analog.”
That period, 19 years ago, also unfolded amidst a doubling of oil prices, which helped set in motion the reckoning to come at Lehman Brothers and Bear Stearns. The resulting trauma saw US lawmakers race to deploy tidal waves of cash, and the US Federal Reserve implement quantitative easing.
The trouble today is that about 40% of the private credit markets are experiencing negative cash flow amid deteriorating geopolitical conditions. The industry’s tendency has been to paper over the cracks, often using so-called payment-in-kind (PIK) debt schemes. Now, though, default rates are increasing fast, and the cracks are becoming harder to contain.
Even before bombs fell on Tehran, private credit markets were quaking. For months, the debt markets essentially priced in a series of Fed rate cuts that haven’t materialized. In fact, even before oil prices surged, Fed officials left their January policy meeting suggesting rate hikes might be needed.
Despite slowing employment, the US economy proved more robust than expected, with inflation higher than feared. The real estate markets took the Fed’s U-turn badly. Meanwhile, the upheaval in the software industry, which relies heavily on private credit, was more intense than expected. And the disruption from artificial intelligence is proving to be quite the accelerant.
Now, the surge in oil is causing investors to pull out the most precarious Jenga blocks all at once. It’s not that simple, of course. The problem isn’t so much leverage in the private credit space. It’s that bank loans to the sector are highly leveraged.
To date, many analysts have been reluctant to highlight risks in the private credit space. That would mean calling out the tech overlords that form most of the business and take on much of the leverage fueling the sector’s growth.
Sebastian Doer, senior economist at the Bank for International Settlements, said, “concerns that AI may disrupt traditional software-as-a-service (SaaS) business models have led to notable price adjustments in the software sector. Software companies’ stocks collapsed by almost 30% between October 2025 and February 2026, while business development companies’ stock prices fell by about 10% on average.”
He added: “Meanwhile, discounts to net asset value, which is largely determined by the book value of illiquid private loans, deepened, potentially signaling worries about underlying valuations.”
The rise of AI has turned things up to 11. Over the last few years, private equity firms have been at the center of 80%-90% of all data center mergers and acquisitions.
At the same time, private credit has grown in scale as traditional banks have grown more selective. In particular, in single-sector real estate, many banks have quickly reached their exposure limits. Private equity firms stepped up to fill the gap using their own private credit units to provide the needed debt facilities.
All this has Hartnett and a handful of other astute observers sensing a whiff of 2008 in the air. The fact that oil price spikes are occurring again amid default worries in an opaque, little-understood corner of the credit markets only intensifies the sense of deja vu.
A key worry is that an Iran war-related inflation panic will quickly increase stagflation risks and place even greater strain on private credit markets and, eventually, the broader banking system.
Back in October, JPMorgan CEO Jamie Dimon made global headlines with a cryptic warning about financial excesses going wrong. At the time, his bank was being forced to cop to missteps related to a $170 million impairment it had just taken related to subprime auto lender Tricolor Holdings.
Around that time, market analysts were also sifting through the forces behind the bankruptcy of auto parts supplier First Brands. And news that Fifth Third Bancorp and Barclays, like JPMorgan, had to take their own credit impairments of $178 million and $147 million, respectively, on Tricolor.
As Dimon put it at the time: “When you see one cockroach, there’s probably more. Everyone should be forewarned on this one.”
Since the Iran war began on February 28 with US and Israeli bombing raids, markets have been on cockroach watch. Earlier this month, Marc Rowan, CEO of Apollo Global Management, predicted a “shakeout” in the private markets. “I don’t think it is going to be short-term,” he said.
Days later, the financial media was buzzing with reports of investment giant BlackRock limiting withdrawals as redemptions shook confidence in private credit. As trouble emerged at Blue Owl Capital and other large private credit players, alarm bells grew louder.
In early March, the media reported on an investment note from hedge fund Rubric Capital predicting a destabilizing wave of defaults caused by a “mismatch between assets and liabilities.”
It cited, in particular, major private credit seller Cliffwater’s opacity at a time when markets are clamoring for transparency as “a canary in a coal mine.” More recently, the Wall Street Journal alleged that many investors are questioning whether Cliffwater’s net asset value is “inflated.”
Analyst Greggory Warren at Morningstar noted that it should “serve as a warning sign for the industry and the rule makers about the downside of illiquid funds for retail investors.”
The biggest risk for the alternative asset managers, he added, is that a marked increase in loan defaults on the part of their borrowers is having an adverse effect on investment performance, which “impacts future fundraising and monetizations.”
For now, Warren explained, fund managers are trying to prevent redemptions to avoid being forced sellers of assets. Naturally, this would negatively impact investment returns for the broader universe of investors, “given the opacity and illiquidity of the holdings in these funds.”
But for how long? An added wrinkle is that, far from cutting rates, major central banks may soon be tightening monetary policy. Even as the Fed gets a new chair in May — Trump’s nominee, Kevin Warsh — its latitude to ease is now vastly diminished. There are growing expectations that the European Central Bank could tighten as early as July.
Trump, meanwhile, is delaying his widely anticipated summit in Beijing with Chinese leader Xi Jinping. That March 31-April 2 trip, during which Trump hoped to strike a “grand bargain” trade deal, is a casualty of his war of choice on Iran. So is Trump’s desire for rate cuts, meaning his two big economic goals for 2026 might not happen.
This lack of Fed rate cuts could exacerbate the “concentration risk” that surrounds the private credit story. As AI upends the tech world, markets are realizing that both the private equity and business development companies’ sectors are highly exposed to the software industry.
If the AI boom continues to limit software revenues, companies racing to build sprawling data centers may struggle even just to make rent payments and service private equity debt.
This is what S&P Global meant recently when it cautioned that the “debt-funded expansion” of data centers was outpacing equity contributions. This makes the sector vulnerable if interest rates rise.
As the data center sector expands at a nearly 15% compound annual growth rate, it’s worth remembering that maintaining that growth will require roughly $870 billion of additional debt by 2030. Yet the risk that the AI bubble might continue to grow, further imperiling the financial markets, is a live one.
As Benchmark general partner Bill Gurley told CNBC, an AI “reset” seems on the way. “When people get rich quick,” he said, “a whole bunch of people come in and want to get rich too, and that’s why we end up with bubbles.”
All this gets at the 2026 problem that few analysts other than Hartnett have recognized. A big surge in rather shadowy margin debt is colliding with oil prices in ways that destabilize the software- and AI-related companies.
This has our Jenga game – and by extension the global financial system – in a wildly precarious state.
Follow William Pesek on X at @WilliamPesek
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